The glass-half-full case for US equities is that they have already fallen about as far they do in a typical recession, so they now have plenty of upside if, as we happen to project, the US economy bends rather than breaks. The glass-half-empty rejoinder is that their slump so far this year has mainly reflected an unwinding of lofty valuations in the face of turmoil in the bond market rather than concern about the outlook for growth, which is only recently starting to mount. Our forecast is that the S&P 500 will bottom out at 3,750 in the middle of next year, as a renewed rise in Treasury yields and weaker activity drag it down further. But we wouldn’t be surprised if it fell to a much lower level if we did get a mild recession – a peak-to-trough drop of about a third wouldn’t then seem out of the question to us. That would correspond to a nadir of slightly above 3,200.
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